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Oct 19, 2001

New economy cynics speak out

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Business|Consulting|Technology
Business|Consulting|Technology
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The strong productivity gains of the late 1990s were concentrated in only 30% of the private sector and are likely to be whittled away in the coming months and years, according to a study released yesterday by McKinsey & Company, the consulting firm. During the boom years from 1995 through 2000, many economists, journalists and Wall Street analysts declared that a new economy had emerged, one in which the productivity growth rate – and standards of living – had improved more rapidly because of information technology, the New York Times reports.

But now that the boom has given way to more than a year of weak growth, widespread layoffs and, lately, the beginning of a recession, the new economy is being re-evaluated. The McKinsey study is the most detailed look at the 1995 to 2000 period published so far. The yearlong study examined productivity in 59 sectors and came to a conclusion that other experts are reaching in this postboom period, in which the stock market bubble has burst, exuberant business investment is disappearing and Labor Department revisions have reduced earlier estimates of productivity growth. More downward revisions are expected. The productivity statistics are important because they measure the amount of output or revenue that the nation’s workers produce each hour on average. The more that output increases, the more revenue there is for an employer to channel into wages or profits or both. The Labor Department had originally pegged the productivity growth rate at 2,8% a year in the late 1990's, up from 1,4% from 1973 to 1995 – a long period of stagnation. The 2,8% figure was lowered recently to 2,5%.

The McKinsey researchers and other experts say that while there has been an improvement since 1995, mainly because of computers and information technology, the long-term productivity growth rate is likely to fall back to about 2%. ‘We have tried not to settle on a specific number, simply because we do not think anyone can know what will happen in the next few years,” said William Lewis, director of McKinsey’s Global Institute, which produced the study. That uncertainty is a far cry from the optimistic proclamations of an increasingly efficient new economy, an optimism still maintained by Alan Greenspan, the chairperson of the Federal Reserve. He is counting on a higher productivity level to help limit the damage from the recession that the US is most likely in. The McKinsey study found that nearly all the surge from 1995 through 2000 occurred in six sectors: retail, wholesale, telecommunications, securities, the assembly of computers and the manufacture of semiconductors. Kevin Stiroh, an economist at the Federal Reserve Bank of New York, has also studied productivity industry by industry and has arrived at a similar conclusion in a study that will be published soon. The improvement came sometimes from the use of computers, sometimes from the actual manufacture of computers and chips and sometimes from the way in which companies were reorganized or operated, regardless of information technology. “IT investment had a significant impact on productivity in some industries and virtually none in others,” the McKinsey study found. Wal-Mart’s rapidly rising productivity and its huge share of retailing, for example, brought up the overall average in that industry. “McKinsey attributes a lot of Wal-Mart’s productivity gains to the large scale of its stores and the organization of its supply chain,” said Robert Solow, a Nobel laureate in economics who was on an advisory committee for the research. “A lot of that could have been achieved without computers.” Productivity surged in the securities industry, partly because of the Internet and online trading, but also because of rising stock prices. That helped to make mutual fund workers and money managers, among others, more productive. Their output was measured in the value of the stocks they handled. In recent months, stock prices have fallen or remained flat, reducing output per hour. The assembly of computers and the manufacture of semiconductors contributed significantly to the productivity surge in the late 1990s.

But that was mainly due to the time spent in production remained essentially unchanged while the speed of these devices increased several fold. As speed rose, so did “quality” and therefore dollar value as measured in the government’s accounts – and therefore worker output. “Computer speed is likely to increase at the same rate in coming years, but people and companies are likely to buy fewer computers,” Lewis said, explaining that the private sector no longer needs so much additional speed.

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